March 2006 changes to trust taxation

Produced by Tolley
March 2006 changes to trust taxation

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • March 2006 changes to trust taxation
  • IHT position before 22 March 2006
  • IIP
  • Discretionary trusts
  • Accumulation & maintenance trusts
  • IHT treatment of pre-22 March 2006 trusts after 22 March 2006
  • Additions of funds to pre-22 March 2006 trusts
  • IIPs
  • A&Ms
  • Relevant property trusts
  • More...

22 March 2006 was the day of the 2006 Budget which, without any warning or consultation, made sweeping changes to the IHT treatment of trusts. The date represents a watershed in the IHT treatment of trusts since many of the key changes took immediate effect. To work out the correct IHT treatment of a trust today, it is necessary to look at whether it was made before or after 22 March 2006.

Before 22 March 2006, trusts fell into the following three main categories for IHT purposes:

  1. relevant property (RP) trusts, which were usually discretionary trusts

  2. interest in possession (IIP) trusts, and

  3. accumulation and maintenance (A&M) trusts

On that date, the relevant property regime (RPR) was extended to nearly all new lifetime trusts, whether in discretionary, IIP or A&M format. Similarly, lifetime additions of property to all existing trusts (with the exception of disabled trusts, bare trusts and some premiums paid in respect of life policy trusts) would also be within the RPR. Transitional rules were given to existing IIP and A&M trusts, but with a view to bringing those trusts within the RPR in the longer term. The aim was to try to make trusts less attractive for IHT purposes, though many other benefits to using trusts remain (see the Why do people use trusts? guidance note).

The main disadvantage of making a relevant property trust is that the settlor incurs an immediate IHT charge, if the value of the settlement exceeds his cumulative nil rate band, whereas prior to 22 March 2006 the settlor would make a potentially exempt transfer (PET) on making an IIP or A&M trust. A further perceived drawback to the RPR is that there are ongoing IHT charges throughout the life of the trust ― when property leaves the trust and at 10 year anniversaries ― although these charges are at reduced proportionate rates. Conversely, there are no charges on the death of a beneficiary.

See the Relevant property guidance note.

IHT position

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